Adam Smith's Lost Legacy

Friday, May 31, 2013

Utopian and Naive Ideas of What is Best for Others

“A major theme in libertarian discourse is the
elevation of the market as a hallmark of human progress. In a three-part video
series titled “Trade is
Made of Win,” Learn Liberty extols the benefits of the division of
labor, not only for its ability to generate wealth, but also for its ability to
enhance cooperation among individuals and conserve natural resources. Many
libertarians believe that man is homo economicus, and
as a result, rational calculation, efficiency, and operating on the bases of
utility receive much attention and esteem within libertarian rhetoric. If
progress is a worthy goal of society, then a sophisticated market economy is a
necessary component to achieving its success. Humans “win” when we economize,
and economization more often than not involves materiality – goods and
services, capital and production, tangible realities that create affluence. The
game of progress, then, can be measured by who has the biggest pile of stuff. …

… Adam Smith
acclaimed the division of labor in The Wealth of Nations as his famous pin factory
example illustrates. But far from extolling only the good
that this division of labor provides materially, Smith questioned
its effect on the interior soul of man. As Smith analyzed various
economic modes of history, he praised agrarian, pre-commercial society because
it could stimulate the minds of individuals better than a division of
labor: “Invention is kept alive, and the mind is not suffered to fall into that
drowsy stupidity which, in a civilized society, seems to benumb the
understanding of almost all the inferior ranks of people.” He continued his
critique on market society:

In
the progress of the division of labour, the employment of the far greater part
of those who live by labour, that is, of the great body of the people, comes to
be confined to a few very simple operations, frequently to one or two…The man
whose whole life is spent in performing a few simple operations, of which the
effects are perhaps always the same, or very nearly the same…naturally loses,
therefore, the habit of such exertion, and generally becomes as stupid and
ignorant as it is possible for a human creature to become…The uniformity of his
stationary life naturally corrupts the courage of his mind.”

Now, one must
remember that Smith was writing in the 1770s, and “stupid” was not a pejorative
in the way used today. What Smith was saying is that a market in which people
only work in mechanized ways can dull the mind into a stupor and corrupt what
otherwise would be a thoughtful, sentimental life - the necessarily
inventive life of premodernism – into a life of monotony.

… perception of idle
time, leisure is a deeply spiritual and affirmative human tradition that stood
in opposition to “useful work” as a means constructed towards an end. Pieper
admonished that “the cultus, now as in the distant past, is the primary
source of man’s freedom, independence, and immunity within society. Suppress
that last sphere of freedom, and freedom itself, and all our liberties, will in
the end vanish into thin air.”

Comment

James Padilioni has written a thoughtful article.I have reservations about some of
it, especially in relation to Adam Smith.

It is half-a-step
too far to say that that the “elevation of the market [is] a hallmark of human progress”.

The market is
certainly the latest step in a long line of steps from mankind living and
surviving in the forest and plains of the habited planet.But humanity has experienced many
forms and variations of ensuring its livelihood.There is no ordained progression from one “lower” to another
“higher” form of livelihood, especially in the sense that whatever happens
later and differently is necessarily a “progression”.Smith said there had been different “Ages of Man” throughout
pre-history and history: hunting, shepherding, farming, and commerce.

It is also obvious
that the “Age of Commerce” can be associated with many forms of markets;
indeed, pure markets have never existed, each was sui generis.Moreover, markets since Smith’s day varied
across Europe and have changed since then, displaying a great deal of different
forms and degrees since he focused his critique on mercantile political economy.
Commerce operated both from developing within and alongside various forms of
farming tenure, and even quite differently in Asian and European experiences.

Development is
uneven.Markets are no exception. That
is why numerous exponents of grand plans to reform markets that we read on the
Internet and in various media are somewhat utopian (and a few are quite
delusionary) because they assume that completely new forms of market
organization can be designed and introduced by supposedly the better
intentions of their designers.I
have commented negatively on several of them on Lost Legacy.

So whether the
“elevation of the market [is] a hallmark of human progress” is something unique
or but an instance in the constantly changing evolution of market organisation
is open to question.

Next, I am
profoundly unimpressed with James
Padilioni’s assertion” that: ‘Many libertarians believe that man is homo economicus, and
as a result, rational calculation, efficiency, and operating on the bases of
utility receive much attention and esteem within libertarian rhetoric.”Whatever the basis of the assertion in
respect of some (extreme) “libertarians” it is definitely not true of Adam Smith or
even rhetorically despite occasional claims to the contrary.I am a moderate libertarian in Smith’s
sense, but I have no illusions that individuals are motivated by “rational
expectations” (what Deirdre McCloskey calls “Max U” theorising) and such an
approach is not supported in Smith’s Works.

Contrary to the
interpretation of the part quotation from Smith’s Wealth Of Nations (WN V.i.f.50:
781-2) given above, James Padilioniasserts that "far from extolling only
the good that this division of labor provides materially, Smith questioned
its affect on the interior soul of man” and was his “critique on
market society”. We have discussed this theme of the dulling affects of the
division of labour many times on Lost Legacy – as recently as last week – and I
have always insisted that we should read Smith’s words in relation to the
subject of the chapter in WN from where Smith makes the case of government
action in respect of the education of youth, which he argued was in a
deplorable condition in England (though less so in Scotland), and not the
usual one claimed (see my posts on “Chomsky”) that it was solely about the
division of labour or its alleged affects.

The widespread lack
of education of the children of labouring families meant they were serially
ignorant and prey to wild ideas from “enthusiasts” and agitators that threatened
social stability.His book was
read by the educated and upper class families and those reading it would be
alarmed at the potential threat to their lives unless they subscribed to educational reform to spread socially stabilizing affects of preventing stunting the ignorant lives of those employed in these emerging modern industries.

James Padilioni closes
with “Premodern man danced, and
made merry, and in the process formed communiity”, complete with a merry, coloured, painting of country folk dancing and being merry.Many authors imply such themes of merry folk dancing round may
poles with explicit themes that contrasts with town folk lined up and slaving
over banks of machines in the “dark satanic mills” of industrial
capitalism.This of course can
give the impression of a once happy labouring population employed joyously on
the land driven by poverty into smelly, crowded towns.I suspect that such images are loaded
with naivety about the realities of farming life throughout history for serfs,
slaves, debt ridden peasantry, and country-folk across the world, then and
today, over much of the pre-market millennia.

The migration of between
countryside and town has always been one-way, which suggests the 'dismal life of
cities', even for low relative pay and 12-hour plus days, are preferred to the illusions of country-life, with 18-hour days in all weathers and even lower to non-existent pay, still experienced in parts of today's world.

Thursday, May 30, 2013

Tim Worstall is Absolutely Right on Adam Smith's Use of the "Invisible hand" Metaphor

Tim Worstall regularly posts in the “Pin Factory Blog” from the
Adam Smith Institute (London) HERE and his post on 20 May was a particular joy for me to read:

“23 Things We're Telling You About Capitalism XVI”

“It's
also rather irritating to be told, again, "that as Adam Smith said about
the invisible hand". No, he didn't: he used the phrase once in WoN, about
the propensity for domestic investment even in the face of the free movement of
capital. It was absolutely nothing at all about the glories of market
coordination. Grr.”

Comment

Regular readers
will know why I am joyous.New
readers can scroll down any week’s posts and read why.

I have long found
Tim Worstall an invigorating author on most days; this particular series on “23
Things We’re Telling You About Capitalism” (this one is “no. XIV”) is no
exception.Follow the link and
read the series from No.1 “things you should know’.

As many readers
will know, I describe myself as a moderate libertarian to distinguish myself
from some Libertarians, resident on the further shores of hard-line
libertarianism, who deny any role for government in market based societies.

I think I am closer
to Adam Smith’s expressed sense on the appropriate balance between the degree
of government/market roles in a free society under the rule of law, not of
politicians (or princes) or “merchants and manufacturers”, and now, “service
providers”.

However, Tim
Worstall is a star in the Adam Smith Institute for snappy, well thought through
pieces on what distinguishes a market-based approach from the usual knee=jerk cry
from both “left” and “right” ends of the political spectrum (though from both
ends there are occasional surprises) to “regulate” this or that.Smith’s approach was to suggest that we
should treat such cries with extreme caution.I concur and find in practice that such cries are often made
as ill-though out (though well-intended on fewer occasions than is good for
us).

Tim’s writing is
consistent: as in the above sentences, he is brief, pointed and relevant. I can
honestly say that he is the first author I have seen in print who understands
the truth of what Adam Smith used the “invisible hand” metaphor to express in a
“more striking and interesting manner” its “object” (grammatical sentences in
the English language are composed of “subjects and objects” – see Adam Smith’s,
“Lectures on Rhetoric and Belles Lettres” [1762-3] 1983); see also the Oxford
English Dictionary, or any elementary , or even advanced text book on English
grammar).

The IH metaphor was
a figure of speech and has nothing to do with theories of markets, price
theories, supply and demand, sociological power, theories of General
Equilibrium, Pareto’s Theorem, and so on among the wishful fantasies of
educated people who forget their knowledge of English grammar.Smith was a longstanding lecturer in
Rhetoric and his students knew of the role of metaphors, as did academic
colleagues across Europe, which is why none of them appeared to mention in
print anything significant about the “invisible hand” in his teaching until
individuals after 1875.`nor was
the IH as significant in economics until after 1944 when Paul Samuelson
mentioned it in his people textbook, Economics: an introductory textbook (McGraw-Hill).

Lost Legacy has
been banging on about this theme since 2005.It is gratifying to note that at least one educated and
literate author has understood this elementary point.

First, I was struck by why it took 5 academics to write a 21-page
sociology paper from Cornel, Rutgers, Pennsylvania, and St. Lawrence
Universities, financed by grants from the Agricultural Experiment Station, and
the USDA/CSREES regional research projects, Civic Community and Civic Welfare.

Having read the output of this uneven collaboration, I am sad to report
that the Authors’ time was not well spent and their grants not really
justified.But then I am not a
sociologist, nor am I well versed in sociological discourse, though I read Karl
Polanyi’s ‘Great Transformation’ and have commented on aspects of it. I have
also read some of the other authors cited in the references.

An opening sentence in the Abstract announces that a ‘founding
proposition [of neoclassical economics] is that an “invisible hand” aggregates
individual decisions driven by rational self-interest into socially optimal
decisions” (515). There is much lost here in the time-line of when Jevons and
co. elaborated their mathematical treatment of economics in the post 1870s and
the emergence of the significant mistreatment of IH metaphor from the 1940s, by
which time the main propositions of neo-classical economics were established (e.g.,
rational self-interest, etc.). These questions are subsumed in the “fundamental
proposition” apparently because “The ‘invisible hand’ is power” (516) and it
dominates “the discursive space”.

Regular readers will recognise this formulation of the evolution of
neo-classical economics is based on a fundamental misrepresentation of
classical economics. In particular the Paper is a falsification of Adam Smith’s
actual use of the Invisible-hand metaphor, upon which falsification, or
‘mistake’, if that charge is too strong, neo-classical economists erected their
entire analytical apparatus post-war. Therefore I found much of what follows in this paper to be a
trip into fantasy using sociology as the vehicle.

The Authors believe that the “conceptual apparatus of neoclassicism not
only dominates academic economics but also permeates global society”, when
instead it should be “consigned to the dustbin of intellectual history” (516).This last is a well-worn, bled-white metaphoric
phrase that is at root deeply offensive to the study of human history.It echoes the ignorant ravings of
beer-cellar reactionaries and their ilk that preferred to throw opponents they
characterised as ‘enemies of the people’, or rather their ashes, into actual
dustbins. Unfortunately, the phrase was common currency among Right and Left
politicos in the 1930s.

Now regular readers will know that I have, and express, no fondness for neoclassical economics and this part of the paper looked promising
until a bewildering jargon of ill-stated concepts from sociology were
introduced:“Theorising
Neoclassical Economics as a Technology of Power” (519), a “meta-technology”, “a
complex web of social technologies”, “legitimating narrative and discursive
resource”, “a subjective construct of interacting individuals and an objective
structure that constrains” (520), “hegemonic moments”, an
“economically-reductionist framework” (521), “a hegemonic framework” and,
finally in this section, an empty assertion that “The invisible hand is power”
(523), with no explanation of what that means.

The last section examines the “Rise and Diffusion of Neoclassical
Economics: a historical/institutional View” (527).It asserts that “economics” “parasitizes the nests of smaller
species”, i.e. other disciplines, though in my experience the spread of such
ideas into other disciplines was and is generated from within the other disciplines (my
former colleagues were not given to associating that closely with
non-economists).

If anything, neoclassical economists borrowed their mathematical
apparatus from physics and other numerate sciences, albeit of later 19th-century
vintage, and used it, unintentionally to exclud other social scientists whose
subjects were not yet expressed in maths or statistics (they were to become so
increasingly), as well as not a few of their less numerate economist colleagues,
from contaminating what they perceived as their own exclusive territory.However, the Authors assert that “the
neoclassical narrative infiltrates society” (528).

Reading this paper to its end, I was mindful that
the Authors were criticising a false version of a paradigm – complete with a
false, modern version of the meaning of the “invisible hand” metaphor.

Monday, May 27, 2013

Moore and Thornton on the IH Metaphor

I shall now examine
more closely the contribution of Mark Thornton to the discussion of Smith’s
metaphor.

“… Mark Thornton’s “Cantillon and the
Invisible Hand” suggests that Richard Cantillon was Adam Smith’s
influence in his description (in The Theory of Moral Sentiments, 1759, and The Wealth of Nations, 1776) of the invisible
hand mechanism (self-interest’s effect of inadvertently providing for the
general welfare). In Thornton (2009), this standard interpretation appears to
be upheld against several modern theories of the metaphor’s meaning.

With this interpretation and then further
development of the idea to incorporate “newer” concepts, we can say that
actions taken for personal gain accumulate in the marketplace in the form of
signals indicating supply, demand, cost, loss, and profit, leading to various
levels of further risk, production, and consumption, which have serendipitous
advantages for others participants in the marketplace. The marketplace
facilitates trade. In a free market, this means voluntary exchange. Since the
Marginal Revolution, it has been acknowledged that voluntary exchanges benefit
all parties to them, or they would simply not take place. Thus, the general
welfare is provided for”

Comment

Mark Thornton’s paper is interesting.He introduces Richard Cantillon into
the debate over the “Invisible Hand” and Smith’s use of it. I think Cantillon’s
role in the history of economic ideas remains relatively unknown to the mass of
economists writing today, and Mark has done a singular good service in bringing
it to our attention.

I shall comment on an aspect of Cantillon’s
work and note how in this respect Cantillon was more accurate in his historical
assessment than Adam Smith.

Cantillon’s Essai Sur La Nature du Commerce was
first printed in 1755 in French, though Smith probably saw a French manuscript
of it in circulation sometime after 1730-4 when Cantillon wrote it.Smith was fluent in reading French
literature; the first English edition was published in 1759.

Turning to Cantillon’s Chapter XI, it opens
with:

“It does not appear that Providence has
given the right of the Possession of Land to one Man preferably to another: the
most ancient Titles are founded on Violence and Conquest. … But howsoever
people come to the property and possession of Land we have already observed
that it always falls into the hands of the few in proportion to the total
inhabitants. If the Proprietor of a great Estate keeps it in his own hands he
will employ Slaves or free men to work upon it.If he has many Slaves he must employ Overseers to keep them
at work: he must likewise have Slave craftsmen to supply the needs and
conveniences of life for himself and his workers, and must have trades taught
to others in order to carry on the work.

In this economy he must allow his Labouring
Slaves their subsistence and the wherewithal to bring up their children.”
Cantillon also computes the equivalent of how much land was required to feed
him and, if married with children, how much more land was needed.Unfortunately he directs readers to
a “Supplement”, since lost, but the rough indication is that “4 to 10 acres” without
“drunkenness or gluttony or excess of any kind” was needed to feed him (Cantillon,
R. 1759, pp 31-33, 37). Of course, “overseers” not the “slaves” interpreted the
actual amounts they actually received over a year of the produce-equivalent
from an amount of acreage of the landlord’s land.

Now contrast this
with Adam Smith’s account in TMS:

“When Providence
divided the earth between a few Lordly masters, it neither forgot nor abandoned
those who seems to have been left out in the partition.These last too enjoy their share of all
it produces.In what constitutes the
real happiness of human life, they are in no respect inferior to those who
would seem so much above them." (TMS IV.i.11: p. 185).

The above extract
from TMS follows the famous IH passage in TMS:

“They [the proud
unfeeling” landlords] are led by an invisible hand to make nearly the same
distribution of the necessaries of life, which would have been made, had the
earth been divided into equal portions among all its inhabitants” (TMS IV.i.11:
p. 184-5).

Now what are we to
make of Smith’s use of an IH metaphor and what did it describe?

Thornton contrasts
it thus, trying to link the IH passage to notions from modern economics:

“Cantillon and Smith
appear not to have incorporated the idea that landlord and tenant could each
receive something they valued more in exchange for what they valued less. So
how could they say that tenants benefit at all? Because the things they
received were necessities, without which they might have starved …Before the
Industrial Revolution was in full swing, tenancy was often just a higher form
of serfdom. Even so, the self-interest of tenants benefited landlords, not just
the other way around. And there were relationships besides those of tenants and
landlords. Merchants and laborers would have also had mutually beneficent
dealings with tenants and landlords. But Smith focused on one aspect of one
relationship in his first economic use of the phrase “an Invisible Hand.”

Comment

Mark Thornton almost gets it right by noting
that the “tenants” (described by Cantillon as “slaves” or “Serfs”) received: “…
necessities, without which they might have starved”.No “might” about it – they would have “starved”!And that is the clue to unravel Smith’s
unstated meaning (remember, Smith was lecturing to students many of whom also attended
his “Lectures on Rhetoric and Belles Lettres”) of the IH metaphor and,
simultaneously demolish the empty case that Smith’s use of the IH metaphor was
about “markets”, the “price system”, “supply and demand” and all the other
fantasies ascribed to the invisible hand by modern economists.

The relationship between landlords and their
serfs or “slaves” had nothing to with “markets”, etc.It was an exchange – the slave labourers laboured and the
landlords provided them with the wherewithal for them to avoid starvation, on
terms decided by the landlords, via their overseers.Each certainly exchanged “something they valued less for
what they got in return.The
“proud and unfeeling landlords” received from the labour of their slaves/serfs
the material wherewithal for their social “greatness”, and the landless
slaves/serfs/peasants received their “subsistence” and
occasional “conveniences”.It was
ever thus throughout human history and pre-history.The propensity to exchange is the “necessary consequence of
the faculties of reason and speech” (Smith, 1776, WN I.ii.2: 25).Exchange is fundamental to what
distinguishes humans from other animals. Adam Smith used the invisible-hand metaphor
to “describe in a more striking and interesting manner” (see Smith on the role
of metaphors in his “Lectures On Rhetoric and Belles Lettres”, 1762-3, p 29)
the “object” of the metaphor, which “led” the landlords to act as they did.
Without the (enforced) labour of the serfs, etc., they could not labour in his
fields; without receiving food, etc., the landlords’ could not enjoy their
“subsistence, conveniences and amusements” due to them to maintain their
station in life.

How modern economists, including, sadly, Mark
Thornton (a modern economist of the “Austrian” variety) fail to see Smith’s
purpose in using a metaphor to describe its “object” is a revealing comment on
the modern appreciation of English grammar as much as it is of modern versions
of the history of 18th century ideas in Smithian economics.

Belief in "Invisible Hands" Spreads to China

“The
use of a pricing tool enables the market mechanism to play a role through
changing the costs. This indirectly guides relevant parties in their behavior
with an invisible hand while they still have the right to choose what they do.”

Comment

Charging
drivers a “Congestion Charge” to take their car, into a city centre that is
seriously congested, is an appropriate use of the price mechanism.

Cars
that do not display the appropriate badge and/ or have paid the Congestion
Charge, perhaps by number plate-recognition from computer-driven sensors, could
automatically be fined heavily. The price to purchase badge and display it is
very visible to those who purchase it, and non-display and number plate
recognition can be set at a multiple of the congestion badge, with successive
increases for multiple offences, including confiscation of the car.

Owners
and drivers who enter the congestion zone without paying for authorization to
do so know of the consequences, and the level of visible fees and fines can be
set accordingly to deter attempts at illegal entry.

The
price system works by visible prices.There is no need for myths about “invisible hands” miraculously“guiding” anybody in a price system, let alone drivers.The proposition is absurd.Those intelligent adults (including
Nobel Prize winners) who believe in an entity they call the “invisible hand” guiding
the visible price system are a phenomenon beyond explanation.

…“Government coercion and market organization. Two very
important concepts for any libertarian to master. Which one better provides for
the general welfare? Smith and Read [author of I, Pencil”] would contend the
latter. The reasons for this are contained in the analogies. As Read and Galles
point out, not much good can come from a clenched fist. Only violence and
incompetence. It can punch. It can pound. That’s about it. What better
description of government? [Gary M. Galles is the
author of an article in The Freeman
about Leonard Read’s analogy of government coercion as a clenched fist, “The Clenched
Fist and the General Welfare” HERE ]Likewise, as Smith notes, the usefulness of markets is that they do
better than government many of the noble things government tries to do, thereby
rendering it redundant, if not unnecessary, in those areas. The all-too obvious
fist of government regulations and mandates is no match for a more efficient,
less obvious hand: self-interest.

The clenched fist of
government coercion is quite visible.
It holds up the occasional good it achieves, downplays the great expense
at which such good comes about, and blames its own inadequacies on “free”
markets. The invisible hand, however, is open.
It is able to do more, and better, than the clenched fist, without stifling
progress in other areas.…

Comment

As a broad brush, general statement, I
concur though I think such distinctions drawn too tightly can be misleading.
Governments play many useful roles, but I would not want to romance the notion;
they can do plenty of harm too.

Adam Smith concurred with these reservations
on their passing mercantile legislation based on false notions of “jealousy of
trade”, on the need to award monopoly powers to special interests (both
examples often urged upon ministers by interested “merchants and manufacturers”
and entering into unnecessary wars (often, in Smith’s days, spurred by dynastic
quarrels and royalist family loyalties, and in ours by ideological or racial
distinctions).Smith also
recognized, as I think we must, that government legislated regulations in
defined fields, such as in “party walls” in multi-occupied buildings in case of
fires, standards of weights and measures in market, the operations of a
national post office, in roads, canals, ports, and local civic tasks like
street lighting, sanitation, waste disposal, pavements, defined property
boundaries, ensuring public education of all children (the ‘little schools’
project on the Scottish model), laws of the sea (a necessary agreement between
national governments), the provision of the justice system (an independent
judiciary, trial by jury, habeas corpus, codification of the laws and
regulations, prisons), regulations of banking practices (Usury), funding the
‘dignity of the sovereign’, as head of state, and basic health provisions (‘loathsome
diseases’).

It is a safe conclusion to assert that over
time both government and non-government distinctions would spread and become more competitive as societies
became more complex and incomes per capita grew, and that eternal vigilance would be,
and remain, required from moderate Smithian Libertarians to scrutinise all
legislation and creeping governmental interventions to extend its reach and
powers over the citizenry.The
extremes of passive submission to a government’s dictation of its own limits,
or fantasies of absolutely no role for government at all (an extreme
libertarian stance) while of philosophical interest, they are not compatible
with Adam Smith’s thinking.Lost
Legacy exists to remind readers of his more realistic stance on those
boundaries.

Home is Best

I am back in windy Edinburgh (no rain) after a week's holiday in France. So its back to normal on the Adam Smith front. With more time in France to post of Lost Legacy, one change I notice is that as the number of posts went up each day, instead of pressing obligations and daily walks, so did the number of visits and hits.
However, my fitness took a tumble (though my general fitness is pretty low compared to everybody I 'pass' on my walk) and the long walks on my journey home, unaccompanied by family, quite frankly caused me noticeable distress. The upshot is that I have to get back to my walks as quickly as possible and my daily exercises, including on my exercise bike.
I'll try to balance everything a bit batter.

Friday, May 24, 2013

Excellent Video from Marginal Revolution Except ....

Tyler’s video is commendably
short, to the point, and covers useful ground as a short introduction to some
of Adam Smith’s ideas.I am
suitably impressed.But then, I am
regular reader of Tyler’s Blog, Marginal Revolution, one of several Blogs that
I read emanating from GMU, plus excellent authors of books like Peter Boettke,
also of GMU. Regular readers will also know I have had some excellent exchanges
of ideas with Daniel Klein, also of GMU, on our different takes on Adam Smith’s
use of the invisible hand metaphor since 2009, where despite our differences we
remain on good personal terms, as befits relations between scholars in the
Republic of Letters, also known as the Academy.

However, in the video, Tyler
Cowen speaks, off camera to several themes illustrated by simple and clear OHP-type
slides.

Tyler announces that he
first read Wealth Of Nations as a teenager, aged 15. And here, at least in my
view, he makes an astonishing statement to the effect that slide no. 1 is
devoted to “the invisible hand”.

The fact that the young
Tyler linked the “invisible hand” metaphor to markets, which only appears once
in Wealth Of Nations in Book 4 in relation to the motivations of some, but not
all, merchants choosing not to send their capital abroad because of their fears
for the security of their capital.Their actions had unintentional consequences that Smith also identifies
specifically as relating to the amount of total of “domestic revenue and
employment”.

Smith discussed markets in
Book 1, along with the price system, supply and demand, and how they were
related.Noticeably, Smith made no
mention of “an invisible hand” as having anything to do with the contents of
Book 1.

From these facts, it is
astonishing that Tyler linked the IH metaphor to markets at the age of 15
sometime in the 20th century, particularly, as nobody even more
familiar with Adam Smith’s Works throughout their adult lives, including some
who knew him, and some leading political economists throughout the 100 years
following its publication in 1776, mentioned the IH in the context to which
Tyler links it.

Certainly, the alleged link
was commonly expressed by scores of modern economists from the late 1940s and
Tyler’s insight at 15 is probably sourced among them.‘Tis a pity that Tyler makes this claim because it gives
credence to the modern myth that the IH metaphor has an obvious organic link to
markets and that Adam Smith said so.Moreover, the 15-year-old Tyler reading Wealth Of Nations for the very
first of many times spotted the link at his first reading. Amazing!

I am disappointed. I doubt
many of his students will bother to check what they are told by their adult
teachers about Adam Smith.I
know I didn’t until well into my academic career sometime in my 30s, though at
first, purely in my reading that was unrelated to my then teaching syllabi as a
Senior Lecturer in economics at Strathclyde University Business School.

Thursday, May 23, 2013

Asymmetric Market Power, Competition and Ethics

The
French Digital Economy Minister, Fleur Pellertin, “is reported to have stepped
in to help a French firm after its mobile phone application (AppGratis) was
suddenly dumped by Apple”.

Apples’ contract enabled the small firm to employ 45 people largely on
AppGratis products and, on the basis of this contract it projected a 22.25
million euro turnover and planned to expand with another 50 jobs.The sudden end of its contract threw
these plans into disarray and it turned to the government for help.

And the socialist Digital Minister’s solution?

“This is not virtuous behaviour appropriate to a firm of [Apple’s] size.I’m asking Apple to act responsibly and
to have an ethical behaviour fitting its brand image,” adding: “the abusive
behaviour of certain giant firms must lead to us thinking about new laws.”

Comment

This
is not uncommon in industry where strong large brand-image firms and major
government departments negotiate contractual relationships with smaller
suppliers.The terms imposed on
suppliers tend to be onerous and tend to be accepted, despite the risks to innovating firms like AppGratis in pursuit of their dreams.

Government
defence contracts are a specialist sector in their own right, of which I had
some experience while at Edinburgh Business School.Private sector
firms have similar onerous ‘one-way street’ contracts with their smaller (often
much smaller) sub-contractors.And when all else fails, bigger firms intimidate smaller contractors
into accepting onerous terms, including with little or no compensation
cancellation clauses**, the size alone of the buyers enables the imposition of
costly consequences on the smaller companies.The remedy of legal process tends to fail because the
outcome is determined by which party has the deepest pockets.

Minister
Fleur Pellertin’s default stance of “thinking about new laws” is probably an
idle threat because what exactly is she proposing in law?What is she going to get her civil
servants to draft?Granted the top
of the French civil service is among the best educated of any civil service in
the western world but their drafting new laws to circumvent the naked monopoly/oligopoly
powers of big business, suggests that their probability of designing workable “virtuous”
new laws to ensure extra-contractual “ethical behaviours” between large and
small contractors is not high.Moreover, the problem is not diminished in public sector
procurement.In France, government
is even bigger and state spending is a bigger proportion of GDP than in the UK.

“New
laws” are the default stance of politicians but usually end as a complication
to already complex legal processes without affecting the underlying power
asymmetry.

That
is why Adam Smith’s hostility to monopolies is still valid but is not easily
remedied in complex societies with wide disparities in market power.His remarks about the benefits of
competition fell on deaf-ears; the monopolising Town Guilds continued for decades,
merchants and manufacturers and their hostility to foreign imports were still
functioning up to two centuries later, including Imperial, and later
Commonwealth, Preferences in food and raw materials, and national defence
expenditures (an obvious monopoly) remained and remain high, and all monopolies are now
subsumed in the European Customs Union.

Fleur
Pellertin stepping in to “help” the very small AppGratis firm with “new laws”
is probably well meant and not just a new politician’s sound bite.The next steps for a socialist Minister
is to consider advocating public ownership as a rhetorical device to be seen by
the electorate as trying to do “something” for smaller firms.I do not suppose that Apple executives
will lose much sleep over that or that anything will come of it.

**
As a consultant negotiator (1987-2005), I found that drafting legal “getting out of
legally-binding contracts” a minor speciality.